SpartanNash: Retail Decline Slowed, Military Segment Struggled Again in Q2

It was, to some extent, more of the same for Grand Rapids, Mich.-based SpartanNash in the company's second fiscal quarter, which ended July 17.

As in the first quarter, SpartanNash's retail segment outperformed the company's food-distribution and military segments: Retail comp sales slid 2.7% year over year, an improvement from the 7% decline seen in the first quarter and beating second-quarter net sales declines of 3.1% in food distribution and 7.1% in the military division. The company also continued to pay down debt and said hiring and retention remained a major challenge. SpartanNash reported net sales of $2.11 billion, down 3.6% from $2.18 billion in the second quarter of 2020. Adjusted earnings per share was 54 cents, and the company paid down $75.8 billion in long-term debt.

But within a quarter that largely tracked with the company's expectations, "you've got a little bit of noise in the data," SpartanNash CFO Jason Monaco, who joined the company in March, said during the earnings call. One of the noisemakers was inflation, which Monaco said saw "pretty big acceleration" over the course of the quarter. For the full quarter, SpartanNash saw inflation in its food distribution business running at around 0.5%, Monaco said, but at the end of the quarter, it was closer to 3% and in the high single digits for meat—on top of already significant price increases a year ago.

Another item the company is watching is the return on its labor investments, including employee training and entry-level wages that are 10% higher than they were a year ago. SpartanNash CEO Tony Sarsam, who has previously cited extended unemployment assistance as a barrier to meeting the company's hiring needs, said the company is now seeing a higher-quality pool of applicants for open roles, and the company is eyeing opportunities to further boost base pay as a tool to help "win the war for talent."

Still, turnover in SpartanNash's warehouses—where pay is generally higher than in the company's retail stores—is running at about 70% vs. a more typical 25%, Sarsam said. In the retail segment, turnover is up modestly, 60% vs. a typical 50%.

With labor accounting for a bigger share of the cost pressures the company is facing than in previous inflationary periods, Sarsam and Monaco said, SpartanNash's strategic moves to reduce inventories in the second quarter helped offset some higher costs elsewhere.

"We had built more inventory than we needed," in the first quarter, Monaco said, and so the company took a step back to reevaluate inventory needs across different locations. That exercise should also help free up capacity for forward buying to keep ahead of rising product costs should needed product become available, he added.

Looking ahead, given what Sarsam described as sustained momentum in SpartanNash's retail business, the company raised the low end of its fiscal 2021 profitability outlook range. Adjusted earnings per share is now expected to range from $1.70 to $1.80 per diluted share, up from $1.65 to $1.80 per diluted share in previous guidance.

"We are very pleased at our overall financial performance," Sarsam said, "but we are not yet satisfied."